Kodak taken down by Pension Liabilities

[TimG]

Kodak has filed for bankruptcy and it looks like it will not emerge.

Most people immediately assume that Kodak was taken down by technological change.

That is part of the story but the real albatross is its pension liabilities.

http://www.forbes.com/sites/greatspeculations/2011/03/22/eastman-kodak-looking-like-a-zombie-stock/

What I bet that very few peo­ple out­side the com­pany itself know is that Eastman Kodak’s pen­sion lia­bil­i­ties could tor­pedo the com­pany and send the stock to sig­nif­i­cantly lower lev­els. In the footnotes of the company’s recently-published 10-K, we found that EK’s pen­sion oblig­a­tions are under­funded by $2.6 bil­lion, about three times the company’s mar­ket value.

The model of employer funded pensions was a ponzi scheme that should never have been created in the first place. When it comes to private companies the free market is able to deal with these mistakes through 'creative destruction'. i.e. companies that offered these pensions go under, the pensioners are forced to take huge cuts in their pensions and life goes on.

[bush_cheney2004]

Eastman Kodak has been in a death spiral for at least 25 years. Peak employment of 66,000 in the mid 80's had declined to about 7,000 last year, with a severe impact on Rochester NY, where many retirees still live and vendors wait to be paid (good luck). Sale of Kodak's patent portfolio will not fetch as a high a price as expected.

http://www.msnbc.msn.com/id/46063521/ns/local_news-rochester_ny/t/kodaks-vendors-impacted/#.Txr1wKhXEmc

Did the gold plated benefits and defined pension plans help to do them in? Most certainly, but maybe it is fitting that such liabilities helped to ultimately kill EK. Some people call that karma.

While certainly not a surprise, it is a mixed feeling to watch such an American icon go under (like Polaroid before it), but Kodak has a far bigger legacy that makes the fall steeper. Ironically, Kodak invented digital photography back in the 1970's, but failed to capitalize on the "future".

I think I will go out and buy some Kodak film and put it in the freezer!

Edited January 21, 2012 by bush_cheney2004

[TimG]

Did the gold plated benefits and defined pension plans help to do them in? Most certainly, but maybe it is fitting that such liabilities helped to ultimately killed EK.

The message here is that employees should not be depending on their company for their pension. If they really want to be part of a shared pension pool it should be completely seperate from the company and entirely funded by payroll deductions.

[Boges]

The message here is that employees should not be depending on their company for their pension. If they really want to be part of a shared pension pool it should be completely seperate from the company and entirely funded by payroll deductions.

Except for Public Servants who will just demand that tax rates increase to make up the difference.

Perhaps Kodak should have purchased the Leafs.

[cybercoma]

Pensions killed Kodak? That's a joke right? It couldn't possibly have to do with the fact that they didn't keep up with technological changes and their recent foray into the printer market with one of the worst products every built, could it? This was entirely the fault of management whose business model was absolute garbage. Some of you people will blame the labour force for everything.

[bush_cheney2004]

... This was entirely the fault of management whose business model was absolute garbage. Some of you people will blame the labour force for everything.

Nope...Management, sales, marketing, engineering, production operations, etc. are part of the same pension liabilities. Nice try....

Edited January 21, 2012 by bush_cheney2004

[bush_cheney2004]

[TimG]

Some of you people will blame the labour force for everything.

Who blaming anyone? The point I was making is defined benefit plans are ponzi schemes and any worker who contributes to them is deluding themselves if they think their retirement is secure because they have a defined benefit plan. Public sector plans are no protection because eventually the scale of the scam will be made public and the taxpayer will refuse to make up the difference. The cracks are really starting to show in the weaker pension funds in the US (largely because with 50 states, statistics dicates that there will more extreme examples than in Canada with only 10).

http://blogs.the-american-interest.com/wrm/2012/01/21/the-great-minnesota-pension-scam/

Under modern conditions, for younger workers especially plans where you make contributions matched by your employer are safer bets than defined benefit plans. In defined contribution plans, they can’t touch your money to pay pensions for older workers; in other plans they can suck you dry to keep the better connected and better organized geezers happy. Your union reps and state legislators won’t tell you about this, but it’s true: badly funded defined benefit programs will be looted to pay the oldsters in full as long as possible, and younger workers will be stiffed when the bill finally comes due.

Edited January 22, 2012 by TimG

[Wilber]

Defined benefit plans were taken advantage of by employers for decades when they were 100% funded by employee contributions and cost companies nothing. It was a benefit, companies could use as a barganing chip which cost them nothing at the time and to hell with the future. Aside from the increasing number of retirees, the problem has been two fold. Government has restricted the amount plans could be over funded and companies were quite willing to take pension holidays as long as there were no shortfall, even if they were not at the maximum limit for over funding. Both government and business put their own revenue interests ahead of planning for a future that any statistician could have told them was comming.

[TimG]

Defined benefit plans were taken advantage of by employers for decades when they were 100% funded by employee contributions and cost companies nothing.

The unions share equal blame because they played the same game so they could pretend to get more than they would have otherwise. If they had insisted on setting up a plan which is completely independent of the company and funded by employee contributions then their would have been no room for overly optimistic book keeping on the part of employers or government. Unions had access to the same demographic information as the company so they can't claim to be ignorant of the problem. Edited January 23, 2012 by TimG

[Wild Bill]

I have posted many times about how I believe that many if not most old, incumbent companies are incapable of embracing change, of how it was not Timex who invented and mass produced the LED digital watch or Underhill the typewriter company who became the leader with word processors.

Basically, if you made buggy whips you were incapable of changing to making car parts. At the start of the process, when you were a rich company with many resources, you were oblivious to the new situation. By the time you woke up, you were too poor to be able to change anyway!

What has happened with Kodak is EXACTLY what I have been talking about!

[dre]

I have posted many times about how I believe that many if not most old, incumbent companies are incapable of embracing change, of how it was not Timex who invented and mass produced the LED digital watch or Underhill the typewriter company who became the leader with word processors.

Basically, if you made buggy whips you were incapable of changing to making car parts. At the start of the process, when you were a rich company with many resources, you were oblivious to the new situation. By the time you woke up, you were too poor to be able to change anyway!

What has happened with Kodak is EXACTLY what I have been talking about!

Mostly right, but it wasnt so much that they were incapable of changing. Theyre digital strategy in the 90's was shaped by a major study that drastically underestimated growth in the digital still camera market outside of Japan. The DID spend about 5 billion dollars on digital imaging research during this time, but it all went into their line of scanners and copiers. By the time they started selling digital cameras the market was already crowded and they were too far behind to catch up.

Obviously every time a companies fails youre gonna get a bunch of hacks trotting out their standard ideological boogeymen (wages, workers, unions, pensions etc), but at the end of the day this company failed because its competitors made much smarter choices.

http://techcrunch.com/2012/01/21/what-happened-to-kodaks-moment/

[August1991]

I have posted many times about how I believe that many if not most old, incumbent companies are incapable of embracing change, of how it was not Timex who invented and mass produced the LED digital watch or Underhill the typewriter company who became the leader with word processors.

WB, I don't think that you can generalize in this way. Sony started out making small, flimsy tape recorders and has coped with many technical changes. Honda is another example. GE has changed radically over the past 80 years or so. Even Kodak itself survived through previous technical innovations. Smith-Corona and Polaroid failed.

Changing technology doesn't dictate corporate death.

Who blaming anyone? The point I was making is defined benefit plans are ponzi schemes and any worker who contributes to them is deluding themselves if they think their retirement is secure because they have a defined benefit plan.

That's simply not true. A pension is a risky proposition but I don't see why the risk should fall entirely on the shoulders of an individual. It makes far more sense to pool the risk and defined benefit plans achieve that.

I think what you are saying Tim is that it is unwise for employees to rely on a single firm (ie Kodak) to generate the future wealth to cover their (defined benefit) pension. IOW, as long as Kodak was a growing concern, then it could easily cover its pension obligations.

-----

One can draw a similar conclusion about Canada's public sector safety net (CPP/RRQ, OAP, GIS and health system). As long as GDP grows, then we can cover our various (DB) obligations. Harper was right, for example, to link federal health transfers to GDP growth.

In this sense, I have never worried about public debt or the lack of an acturarial basis for our State pension schemes or our State health insurance system. We don't need a State pension fund or a State health fund. Indeed, we don't have a State health fund and our health system (and OAS and GIS) are pay-as-you-go. The CPP/RRQ should stop the pretense of being funded. Admittedly, this would have an effect on our savings rate.

----

Life itself, in a sense, is a Ponzi scheme. We rely on younger people to take care of us in our old age. If everyone were to stop having children today, who would care for the last generation?

Stop having children? As I like to say, the world does not lack for children; it lacks for educated children. The boomers who are approaching old age should be more concerned about the civility and competence of young people than about public debt. In particular, those boomers without connection to children or nephews/nieces will likely face greater hardship - regardless of debts, pensions or savings.

Edited January 24, 2012 by August1991

[TimG]

I think what you are saying Tim is that it is unwise for employees to rely on a single firm (ie Kodak) to generate the future wealth to cover their (defined benefit) pension. IOW, as long as Kodak was a growing concern, then it could easily cover its pension obligations.

What I am saying is there should have been no dependency between the success/failure of Kodak and the pension. The contributions should have be large enough at each payroll to cover Kodak's negotiated obligations and the responsibility for any investment losses and the benefits of any surpluses should rest with the pension beneficiaries and the third party management team they hired. The delusion was the construction of a pension fund where the company was responsible for short falls because this encourages companies to skip on funding.

In this sense, I have never worried about public debt or the lack of an actuarial basis for our State pension schemes or our State health insurance system. We don't need a State pension fund or a State health fund.

There comes a point where the interest costs consume too large a portion of the available revenues. This is when a state must default on its debt. If you are a bond holder this is a very bad thing and many average people are direct or indirect bond holders. Edited January 24, 2012 by TimG

[bush_cheney2004]

[MiddleClassCentrist]

http://blogs.the-american-interest.com/wrm/2012/01/21/the-great-minnesota-pension-scam/

Your union reps and state legislators won’t tell you about this, but it’s true: badly funded defined benefit programs will be looted to pay the oldsters in full as long as possible, and younger workers will be stiffed when the bill finally comes due.

In Ontario, it is illegal to claw back pensions of people who didn't pay enough into them.

The Ontario teacher's pension plan is having this problem. Retired teachers did not pay enough into their pension. Young teachers (and tax payer's) foot the bill.

Our entire system is a pyramid scheme for the the 55+. It only works when we are growing and there are more people on the bottom than the top...

[Shady]

Come'on guys, I'm suprised some of you aren't more happy. This is an evil multi-national corporation getting what it deserves, no?